Goldman CEO Touts Firm's Risk-Management Prowess

NEW YORK -(Dow Jones)- Goldman Sachs Group Inc. (GS) Chief Executive Lloyd Blankfein touted his firm's risk-management prowess, saying the secret to Goldman's success is its ability to gauge the assets it is holding on its balance sheet.

Blankfein, speaking Friday at a New York conference organized by University of Pennsylvania's Wharton business school, said Goldman places special emphasis on mark-to-market pricing of securities and other assets.

"If you rigorously mark to market every day...it's not impossible to have a very big problem, but it's less likely," he said. "It's annoying from time to time, but it's the single most important thing at our firm."

Blankfein spoke at the end of a week in which Wachovia Corp. (WB) and Morgan Stanley (MS) added their names to the list of companies that have said they expect to take fourth-quarter hits of at least $1 billion stemming from the eroding value of assets tied to subprime mortgages. Some banks have struggled to accurately value their mortgage-related holdings, many of which are thinly traded and therefore hard to determine their prices.

Goldman surprised Wall Street in September when its fiscal third-quarter earnings exceeded expectations, even as peers suffered amid the credit crunch and violent market swings. Goldman so far hasn't warned of writedowns in its fourth quarter, which ends Nov. 30, but rumors have swirled in recent weeks that the firm has racked up hefty mortgage-related losses.

Blankfein told the audience of MBA students and others that after the recent " sunny" period for financial firms, the market turbulence that started this summer means nobody is necessarily safe from sudden losses. He said he often cautions Goldman employees against hubris.

"Even with only two weeks left (in a fiscal quarter), there's plenty of time to have the worst year ever...because things can change so quickly," Blankfein said he tells employees.

Blankfein noted that the recent credit crunch stemmed in part from risk being priced at extraordinarily cheap levels. Today, he said in a brief interview after his speech, risk pricing has moved "in the right direction," but he said he is "not sure" if pricing needs to rise further.

A few weeks after Dick Grasso was ousted as chairman of the New York Stock Exchange, I ran a hypothetical scenario by a senior media-relations executive at Goldman Sachs. âWith Grasso gone,â I began, âdoes this not open the door for a Goldman takeover of the NYSE?â

The flack laughed and said I sounded like an overcaffeinated conspiracy theorist with way too much time on his hands.

The next time we spoke about the matter was roughly two years later. Goldmanâs then-CEO, Hank Paulson, had sold the companyâs ECN, Archipelago, in which Goldman owned a 15 percent stake, to the NYSE. Paulsonâs No. 2, former Goldman president John Thain, was now the NYSEâs CEO. Additionally, Goldman served as the Big Boardâs investment banker on the deal, which essentially took the exchange public. The NYSE was finally entering the modern age. Grasso was out, electronic trading in. The floor would suffer, but it would be for the best: cheap, efficient electronic trading and the final expiration of specialistsâ license to print money. The end of an era.

It has been four years since the diminutive but powerful Grasso was fired amid outrage over his massive retirement package. For the skeleton crew of floor brokers and traders who are left (and the scores who arenât), life will never be the same. The exchange is a shell of its former self. Many guys are making the best of it, but most are long gone â and resentments linger. They used to call the NYSE âThe Club.â Now some on the floor call it the âGoldman Sachs Exchange.â

I think the current problem finds its roots from the same thing most other financial crash's are caused from; greed. Just like the '29 '73 '87 '00 crash's were caused from rampant greed. Banker's and lenders got too greedy in '05 '06 and starting lending money for little or no margin to flimsy borrower's and not receiving sufficient premium to compensate for the underlying risk. Much of the risk was securitised and sold off in tranches to various portfolio's around the world, the firms would collate those security's into other portfolio's in an attempt to reduce risk. Inevitably, the defaults started rising and those CDO's risk premium was furiously priced in at more realistic levels. The market for the CDO's went into capitation as everyone attempted to bail or had been margin called. A firm may hold many different portfolio's, securities and implement many strategies and think its well balanced and diversified, but the problem is so does the other firm next door holding the same issue's, therefore when one area is margin called, selling in other area's occur, with everyone selling the same assets, therefore there is correlation among different assets and explains why many quant funds have had a up-setting summer. House prices had exploded abnormally over the past few years into a un-sustainable growth, this has just recently begun to revert to the mean and looks like there's plenty more room to go, especially with some 900Bil - 1Tri in subprime/Alt A mortgages re-setting higher early next year, coupled with the pain at the pump the average consumer looks hard pressed at the moment. So the sunny days of low doc cheap capital are over and risk is being priced more realistically as are the asset's backing them, therefore a reversion to the mean is taking place removing some of the excess froth taking some balance sheet's and profit's down with it to ultimately return to economic equilibrium in the credit markets. Few firms may be able to hedge their way out of this, but on balance everyone will have to feel some pain as payment for the recent rampant greed.